by Chude Jideonwo
I remember being a law student at the University of Lagos. The law of taxation was my worst course. I thanked God that I would never have to deal with this again. If only I had known that as a businessperson, tax law would once again be my worst course. Only this time, the exam is forever.
There is something that young people like myself when we wonder at the usefulness of conventional wisdom – the question is rendered in broken English, but the prevailing sentiment is stubbornly universal.
It asks for the utility and usefulness of the convention in question. In the case of tax, they would ask: “who tax don epp?
There is a reason the conveners of this meeting wove the subjects of taxation, governance, democracy and development are very tightly together. Modern governments need money, lots of money, in order to run nation states. Where and how they get this money has a profound effect on the political economy of a society.
The imperatives can be broken into three simple questions:
- How do governments get money to run their operations, and to achieve their goals? (Taxation)
- How do citizens take ownership of and in that process? (Governance through democracy)
- How does that create a loop of accountability that leads to the bottom-line? (Development)
For much of its life, Nigeria has been run on oil money. Our oil addiction took off fully in the 1970s, and we have not looked back. Like a junkie who sells all the family jewels to sustain its habit, Nigeria gradually abandoned the things that made it great. And we might want to gloss over it because we are to be polite here, but you know it as much as I do: many of the people who have spoken over the past few hours supervised our common wealth, and they did so with irresponsibility as their governing principle.
Even through price collapses of the 80s and the low prices for nearly all of the 1990s, we were not shaken out of our addiction. Now, over 18 months into the most recent bust, the long and short of the times we live in now is this: Low oil prices mean our government is looking for money. Everywhere. From everybody. At once.
They are running after those who stole our commonwealth, plugging leakages, and they are also talking about raising Value Added Tax, stamp duty and expanding the tax base.
Our petro economy meant that Nigeria had, pre-2000, never really bothered with taxes as a nation. It has always been much easier to simply drill a hole in the ground, sell oil, and have finance commissioners from the 36 states gather in Abuja once a month to share the proceeds. The resulting intellectual laziness spread from the federal government down to the states, and gave us a bloated government that remains with us to this day, one so bloated, it sucks the life out of everything else around it.
It is from this near lifeless mass that the government wants to extract taxes.
Oil prices are down and people are fasting for it to go up, government is now deciding to go borrow from the World Bank and the African Development Bank to finance its fantasy (deficit) budget, and the black market already devalued the naira while the CBN struggles with reality and schizophrenia.
So the government has turned to a very lazy option in the absence of income, realism or continued growth: it wants to tax the life out of people like me, who slowly and steadily – without access to funding, government intervention or even serious minded engagement – began to build businesses when everyone else was busy drinking oil.
In essence, to solve a problem it caused, the Nigerian government resorts to type: punishing those who were trying an alternative solution.
Thinking through tax
When it comes to paying taxes, Nigeria ranks 181st out of 189 countries.
There are, amongst other things, three major hangers for this reality:
1) Let’s see Nigeria’s position on the World Bank’s Doing Business Index. We currently rank 169th out of 189 countries, and in the ‘Starting a business’ measure of that Index, Nigeria ranks 175th out of 189 countries. If you have ever tried to register a company with the Corporate Affairs Commission (CAC), you are likely to agree with that ranking.
How many have been put off from registering their businesses as a result? How can you tax companies you do not know exist? I am aware of associates who have simply decided to run their businesses from their homes, rather than wear themselves out with that mating ritual. The result is a potentially huge loss of value. What’s worse is that nothing has come out of repeated statements from government officials to reform the CAC. Something so basic.
2) The sheer number of these taxes is a disincentive to any business that decides to be fully tax compliant. As a business owner, I am liable pay a dozen different taxes and contributions – VAT, PAYE, Company Income Tax, Tertiary Education Tax, Business Premises Levy, Development Levy, National Social Insurance Trust Fund, Industrial Training Fund, National Housing Fund, Pensions and the Lagos State Signage Act. The ridiculousness of these competing demands without commensurate value makes those who choose to pay them feel like fools.
3) The arbitrariness of the tax collection authorities, making silly assessments of people’s wealth based on popularity, randomly invading offices and terrorizing citizens, acting with righteous anger to offend the sensibilities of decent people who want to make a living and pay their fair share. That’s asides the complexity of the payment process and lack of accountability on these multiple taxes.
You cannot tax poverty
But this is the most urgent of those reasons: the unfairness of the tax architecture. The unreasonableness of taxing businesses over and beyond what is sensible simply because the government has expenses it simply not afford.
There is first an impossibility in convincing a honest businessperson about the sense in paying more than 10 different taxes in a nation where political leaders – who do not understand the value chain for creating industry – can be found miraculously with anything from 400,000 million to 4 billion naira in their accounts.
The rationale is simple: it appears hard working business people are suffering for being stupid enough to choose creating value over participating in the National and State Olympics for Stealing Government Money.
The second is that in a climate notorious for stifling innovation and creativity, and where the best capitalized young businesses these days are lifted by a tide of venture capital funds from other markets, any measures that are perceived as rent collection by another name will find it difficult to gain social currency.
Thirdly, save for the Lagos, Kaduna and certain other state governments, there is a clear absence of any purposive drives for wealth expansion – to help businesses grow, create more value, employ more people, increase the volume of already existing tax capacities and to inject commerce with a renewed urgency.
Indeed, within the context of the National Assembly rapaciously draining the common wealth through allowances and salaries fixed far above the recommendation of the Revenue Mobilisation and Fiscal Commission, and the federal government-scoring zero in the 100-day assessment by SBM Intelligence report on ICT, on job creation and on a long-term economic vision, it has become clear that there is a lack of concerted efforts to increase wealth, to expand income, to deepen industry.
The fact that our governments have always been able to extract oil rents is one of the reasons why they have forgotten how to be real governments. A real government ensures that it provides an atmosphere for its people to prosper, knowing that you can’t tax poverty.
There is a reason Nigeria’s tax to GDP ratio is about 6 or 7%, one of the lowest in the world. You can only tax wealth that is created, and wealth is not created by accident.
Can the government really afford the immediate consequences of its renewed tax vengeance: citizens who choose not to establish new businesses, at least those trackable via the formal sector, or who decide they will vanish from the tax bracket entirely?
Because, where revenue drives seem like gimmicks drawing from short term thought rather than long term strategy, citizens withdraw from fulfilling their social contract in this case, taxation.
No one likes a friend, however big and no matter how enthusiastically that friend was voted for, who never gives, but only collects.
Which is where long term thinking about how to expand wealth, and strengthen the citizen-government social contract becomes imperative.
Thinking through the social contract
Governance is about institutions, and the type of governance in a society is based on what types of political institutions exist and how these institutions are configured. These institutions also determine how wealth is created, how resources are allocated, and in whose hands the created wealth remains.
In ‘Why Nations Fail’, Daron Acemoglu and James Robinson examined the reasons why some countries are rich and others poor, and come to the conclusion that rich countries have inclusive political institutions, while poor ones have extractive political institutions. According to them, inclusive political institutions lead to inclusive economic institutions which support economic growth, and extractive political institutions often lead to extractive economic institutions, which restrict economic growth.
Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Inclusive political institutions on the other hand, distribute power broadly in society.
Nigeria’s brief period of optimism as a nation came to an end with the 1966 coup, after which power was taken from the regions and vested in the center in a unitary system of government. This created a highly extractive political system, which was manned by the military unto whom political power was concentrated, along with their civilian collaborators.
The oil boom of the 1970s put the final nail in the coffin. Since all favours came from the center, the military doled these out to themselves, the political class and the civil service in the form of things like the Udoji Awards. They determined who did and did not succeed in business, and were accountable to no one.
In addition, the contest for these resources at the center brought things like ‘federal character’ and ‘zoning’ into our national lexicon. Everyone had to have the opportunity to get their nose in the trough. Such a belief is also behind the clamour for more states, never mind the fact that most of those we have now are merely names on a map.
It will take a long time to rid ourselves of these extractive political institutions and consequently improve governance.
When oil was the means by which government got its money, bad governance was overlooked, tolerated. It became: ‘Just leave us alone, and we will leave you alone’. However, a country run with money generated by the taxes on economic activity will be different. Which is where the present tax drives will yield important fruit.
A focus on taxation often brings with it increased interest in accountability, first to establish credibility and then to fan momentum.
To which the question must be asked: Does any government that spends billions on feeding itself and its hungry guests stand any chance in gaining credibility with the very people it wants to tax?
Can a state whose 2016 budget is currently not available by line items anywhere, even when the bulk of its revenue is Internally Generated, be seen as credible in demanding that businesses be accountable? The short answer is no.
It’s unacceptable really. It leaves the process of budgeting open to wanton abuse, and disempowers the people, apart from stealing their faith in government.
Many will of course remember that significant part of what caused the unrest that led to American Revolution, was taxes. The Englishmen who settled in the US were subject to laws by the British Crown, without having any say in how those laws were passed and taxes were imposed. One of the slogans became, ‘No taxation without representation’ and soon enough, it led to a revolt.
And that is the crux of the matter: in a space where a people have chosen democracy as the way they prefer to be governed, governments cannot act like know-it-all uncles. Actions and policies must be driven by an appreciation of what citizens determine to be just, to be fair and to be effective.
Democracy relies on that concept of a social contract:
You do your part, and I do mine.
You ask for my permission, then you act on my behalf.
In the meantime, here is our reality. The economy remains firmly beholden to the oil and gas sector, and by and large, it is the same characters in charge, operating through fronts.
Everything else is downside up.
A report by Ernst and Young on Nigeria in 2014 showed that 52% of foreign direct investment inflows went to the oil and gas sector since 2007, and even domestically, loans to oil and gas firms by Nigerian banks also crowd out other sectors of the economy. Even though oil contributes 11.2% to GDP, bank loans to that sector make up an average of nearly 30% of total loans, while other sectors like manufacturing receive far smaller shares.
This morning, the FBN Merchant Banking and Asset Management Report presents scary news: Nigeria records the worst manufacturing data in January 2016, falling to 44.6 versus 54.2 only last month.
Yet there cannot be any genuine development without a reallocation of resources toward manufacturing for export, which will generate employment and create a more resilient economy, one immune to the ups and downs of the global oil markets.
This reallocation must also expand towards vast areas of growth yet untapped, cliché as they now are, across an array of areas including the creative industries and ICTs.
And here lies, as business researcher, Jim Collins advise those two decades ago: the imperative for the genius of the AND.
Yes, taxation is presumably a tool for development. The purpose of taxation is for government to provide the public services – security, electricity, health care, water, roads, schools and a social safety net – that make development possible and sustainable. When applied judiciously to public infrastructure, these taxes can help create wealth, by having a healthier, better educated, better connected society that is secure and gives people the platform to become the best version of themselves.
The social welfare programmes of this administration are therefore worthy of commendation in a country with so many poor people.
However we need to think and tackle these imperatives with discipline and humility. The humility to say, we have this problem, it’s a major, stubborn problem; and ideas from the past will just not do for a world that has radically, considerably changed.
The reality of the new world is this: we must rapidly expand wealth, and include millions in that growth.
Only a focus on expanding wealth now and into the future can make a real difference, even in keeping these socalist pogrammes sustainably.
We need to both ensure efficient tax regimes, direct them towards social welfare while AT THE SAME TIME, creating and expanding wealth from those who have the capacity so to do (Hint: Not government).
The current challenges with crude oil prices offer yet another opportunity for the Nigerian state to change the focus of its economy, to build an economy worthy of its name.
This is a frustrating fact: we have gone through the pain of low oil prices before, but have not learnt any lessons. So the imperative is simple: before anything changes, the thinking at the top of the government needs to come into the future.
And this is the future, a focus on spending alone is a focus on failure, a focus on collecting and collecting alone is a focus on tyranny, even a focus on pursuing thieves alone can lead to a dangerous tunnel vision.
The one focus any economy interested in owning the future must have is creating wealth, expanding that wealth and then bringing more into the bracket of its rising tide.
There is something I learnt a while ago as a young business person studying the secrets to wealth: neither good nor bad luck are in themselves good or bad. It’s the return on luck that makes the difference between that last and those that die.
The collapse in oil prices is bad luck that can do us a huge favour.
We have a massive opportunity to change the character of our democratic institutions and thereby unleash the Nigerian potential I have been hearing of since I was born in 1985.
If we can begin immediate to apply the discipline of thought and action to create wealth in an inclusive sustainable manner, then instead of taxing to death the little that we have, we will create more and better that we can tax comfortably, and win with, now and far into the future.
- This Best Outside Opinion was presented by Chude Jideonwo, Co-Founder Managing Partner, RED, at the Inaugural Conference of the Ibadan School of Governance and Public Policy, on 1 February, 2016.